What the SECURE Act 2.0 Could Mean for the Seasoned Saver

The legislation, passed in December, will roll out over the next decade.

Following in the footsteps of its 2019 predecessor, the SECURE Act 2.0 is making big changes to the way Americans are saving for retirement. Following the passage of the law in December 2022, millions of Americans are subject to new opportunities and restrictions within their 401(k) accounts. Here are the three sections of the law that are most likely to affect your retirement.

Higher catch-up limits

As Americans near retirement, they should have the ability to direct more of their assets to their retirement accounts. At least, that's the idea behind the catch-up contribution limits that are currently available to Americans aged 50 and older.

While the average saver is limited to deferring a maximum of $22,500 (2023) into their 401(k) account, those aged 50-plus can contribute up to $30,000 (2023). That $7,500 difference is called the catch-up contribution limit, and can make a big difference when funding a retirement account. And catch-up contributions aren't limited to employer sponsored retirement plans -- they exist, at a significantly lower annual amount, for individual retirement accounts, too.

The SECURE Act 2.0 sought to expand catch-up contribution provisions by enacting a second tier of the retirement-saver's perk. Those who have reached age 60, 61, 62, and 63 will have the ability to contribute even more to their retirement accounts than the original catch-up limit. How much more? Either 50% more than the regular catch-up contribution or $10,000, whichever is greater.

'Rothification' of catch-up contributions

Staying on the topic of catch-up contributions, let's discuss how they are treated from a tax standpoint. Prior to the SECURE Act 2.0, catch-up contributions could be made on a pre-tax or a Roth basis, if the plan allowed. However, the new law will restrict that option for certain taxpayers.

Starting in 2024, savers earning over $145,000, indexed for inflation, will be required to make catch-up contributions on a Roth basis. Although those workers will receive tax-free income in retirement, their catch-up contributions will not be tax deductible. This may be a raw deal for workers who lock in their current tax rate, which will likely be higher than their post-retirement tax rate.

Employer Roth contributions

Many employers offer matching or non-elective contributions in their 401(k) plans. However, those contributions were restricted to being made on a pre-tax basis only, even if the savings they matched were made on a Roth basis. Following the passage of the SECURE Act 2.0, however, employers may now offer workers the option to receive these contributions on a Roth basis. Note that employers may choose to offer Roth contributions, but are not required to.

Over the next few years, those nearing retirement will need to consider the implications of the SECURE Act 2.0. Higher catch-up limits for those in their early 60s, as well as employer contributions made on a Roth basis, will present new opportunities for savers. However, the "rothification" of catch-up contributions may lock some into a tight tax spot.